Bulkowski's Expeditor Int'l Trading Quiz

The earnings flag shown on the far right isn't a flag at all but a pennant. It happens after a good earnings announcement, like that shown in red (when price gapped up). Price has broken out upward from the pennant.

Answer 1: Earnings flags are the best performing event pattern. Buy. Price must make a large intraday price swing or gap higher and then consolidate.

Answers 2, 3: From my trading notebook. "Filled at: 43.989. Stop: 40.03, for a potential loss of 9%. Upside target: 46 as per measured move up from 36 to 42, then 40 projected upward. Mood (will trade work? Bought too soon?): pissed that GI trade was stopped out but confident of this one. S&P direction over pattern lifetime: Downward for last 1.5 months. Future market direction (guess): Up. It's finding support at the last recent minor low. Market is nervous over oil price and inflation, rising interest rates looming.

"Buy reason: Earnings flag and stock is moving higher as market is going down. Nice flat base at 38 and 41."

I show the measured move up in red on the above chart. In theory, the second leg is supposed to copy the move of the first leg.

The red line shows the downward price trend I spoke of. The green lines show underlying support. The top green line is just below the 38% Fibonacci retrace of the move from A to B, suggesting price might reverse and move up, as I wrote in my notebook.

Here's the oil chart. At the time I bought, you can see that oil was on a steady climb since the September low.

This is the flat base at 38 and 41 my notebook refers to. It's not exactly flat, is it? Notice the dip at the end of the rectangle (circled). I've noticed that these types of dips occur before a nice move higher.

This is what happened to the stock over the coming days. The red circles show the stop locations that my notebook entry details.

"5/26/04: Stop raised to 42.37. 6/2/04: Stop raised to 43.73 (and so on)." Most of the circles correspond to new highs in the stock. As price climbed, you can see that the circles became bunched. I grew more concerned the higher price climbed.

Question: Is it time to sell or hold on for additional gains?

Here's my notebook entry for the exit. "Date: 7/21/04. Filled at: 49.022. Mood (sell too soon?): Yes, at least intraday as price rebounded after I sold. In the short term, I see market weakness and weakness in this stock. It is struggling to get above 50 and stay there. I expect another decline then another try for the top.

Sell reason: The market is up 88 points and this is down 82 cents. All the other stocks in my portfolio are up today. That signals a trend change. The rate of change (ROC) oscillator has been trending down for months now (since April), diverging from price and I see momentum lessening. It may be that I want to protect my profits after two recent losses. Earnings are due in August 6.

Yeah! I just logged in and the stock closed 2.64 lower! I got out just in time and the DJIA [Dow Industrials] was down over 100."

I made over 11% on the trade. Notice that even though the indicator signaled divergence (lower highs on the indicator but higher highs on the stock), I bought and made money.